Many startup founders we’ve spoken to at ProRata started out (or are currently) tracking revenue in a cash-basis. They soon realize the value in switching to an accrual-based revenue model.
Cash vs. accrual accounting
Simply put, cash based accounting would say that you recognize revenue as soon as you receive payment for it, regardless of when the service was performed.
Accrual based accounting recognizes revenue when the service is performed, even if it is pre-paid or on Net 30 terms. It it especially important for software companies who collect pre-paid subscriptions to understand how to recognize revenue over the life of the subscription.
Don’t leave money on the table
In a recent article on SaaStr, Anita Kutlesa talks about a CEO who lost several millions in his purchase price because revenue had to be converted from a cash-basis to accrual-basis at the time of sale. It’s important to understand how revenue should be recognized and to maintain your books on an accrual basis.
The earlier you start properly recognizing your revenue, the less headaches you will have in the future. You will save money by avoided re-reporting revenue and you will have a true snapshot of your company’s revenue. ProRata helps software companies who use QuickBooks to simplify and automate revenue recognition.